Benefits and Compensation

10 Steps to an Executive Compensation Plan That Works

Many think executive compensation has gone way out of line in recent years. Here’s a 10-step plan to make it work for the company, and not just the recipients.

If any issue has come to the fore during recent corporate scandals, it’s that of executive compensation. The files of investor organizations, and attorneys-general, as well, are full of stories of high-level executives pocketing gigantic bonuses and unbelievable perks even as they sometimes ran their companies right into the ground.

From an HR perspective, such shenanigans were possible because of irresponsibly drawn executive compensation plans. Plans that completely lost touch with the reality of what an exec comp plan ought to do … make executives successful only when their companies are, with the degree of that success directly keyed to the growth of the organization they lead.

What are the essential steps in building a solid executive compensation plan? According to Fundamentals of Executive Compensation, written by Hartford, Conn.-based employment law attorney Mitchell Fishberg, and BLR editors Susan E. Prince and Catherine L. Moreton, here’s what needs to be done:

1) Decide who is covered by the plan. Will it be only senior management or will it also include department or functional managers?

2) Align your compensation strategy with company goals. This key step should build rewards into the plan that march in accord with both your short-term and long-term objectives.

3) Benchmark against comp plans of similar companies. Today’s reality is that you’re in a race to acquire and keep the best talent, so your packages must be competitive. You also need this information to avoid overpaying.

4) Set a base pay, usually through industry surveys or by adding a significant percentage jump from the individual’s previous salary.

5) Use cash incentives to meet short-term goals. Cash is usually used to reward an executive for completion of a specific project or for hitting a specified financial goal within a given time frame of up to a year. Some experts suggest that such short-term incentives make up 15 percent to 40 percent of total pay.

6) Use long-term incentives to meet larger goals. When the goal is more than a year out, many companies reward top performers with either stock options or other long-term payouts that encourage staying with the organization well into the future.

7) Add supplemental benefits, including health, life, and disability insurance. “These add extra value to the package,” the authors write, “and they’re not usually costly to the company.”

8) Provide deferred compensation options. These usually pay out at retirement. They increase in value over time, due to compounding interest, without you having to add more cash.

9) Pack in the perks. A company car, upgraded air travel, and health or golf club memberships tell executives they’re special, without greatly increasing the size of the package. They’re also attractive in recruiting efforts.

10) Evaluate the program. Once a program rolls out, evaluate it yearly. Make sure the executives remain onboard with it, but most important, make sure that it’s achieving the primary goal … building success for the company, not just the participants.

A Vital Resource

Just as capable executives are one of the most important resources of your organization, Fundamentals of Executive Compensation is one of our most important HR programs.

Covering every aspect of the subject (click Full Table of Contents below), and including several sample executive employment agreements, the book will prove a valuable ally in making sure you get and keep the best in executive talent, at a price you’re able to afford.

Click the “for more information” link below for a more in-depth look at this vital resource.

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